Incident: The company released its 2020 interim report. In 2020H1, the company achieved operating income of 1.008 billion yuan, a year-on-year increase of 17.50%; achieved net profit of 0.129 billion yuan, a year-on-year increase of 26.91%; achieved net profit of 0.129 billion yuan, an increase of 26.27% over the previous year; and realized net profit without deduction of 0.121 billion yuan, an increase of 31.60% year on year. Among them, in 2020Q2, the company achieved revenue of 0.616 billion yuan, a year-on-year increase of 34.02%; achieved net profit of 0.097 billion yuan, a year-on-year increase of 64.89%; realized net profit to mother of 0.097 billion yuan, an increase of 64.16%; and realized net profit without deduction of 0.09 billion yuan, an increase of 35.73% year-on-year. Performance growth exceeded expectations.

The company's performance growth exceeded expectations, and the gross margin increased significantly: the rapid increase in the company's gross margin led to the company's performance growth exceeding expectations. The company's gross profit margin for 2020Q2 was 44.09%, an increase of 9.03 percentage points, and the gross profit margin for 2020H1 was 42.22%, an increase of 10.25 percentage points. We believe there are three main reasons for the rapid growth in the company's gross margin: (1) the CDMO business with a relatively high gross margin is growing rapidly, and the share of revenue continues to rise; (2) the CDMO business segment's order structure is continuously optimized, and the share of high-value-added business revenue is increasing; (3) the gross margin of the company's specialty APIs sector has also improved, and export prices for specialty APIs are showing an upward trend. Considering that the COVID-19 pandemic has accelerated the domestic transfer of global orders, the continuous improvement of the company's CDMO technical capabilities, and the continuous increase in the company's brand awareness and trust, we believe that the company's CDMO business will continue to develop rapidly.

The rapid development of the company's CDMO technologies lays a solid foundation for continuous optimization of the order structure: the company continues to advance in many key technical fields. 2020H1, the chiral catalytic technology platform completed the customized synthesis of 42 chiral ligands and catalysts; the fluorine chemical technology platform is in deoxyfluorination reagents and difluorineCarbineBreakthrough progress has been made in the development of reagents and difluoromethylation reagents. 3 fluorochemical reagents have completed process optimization and pilot production; the continuous microreaction technology platform has completed the multi-step continuous Grignard exchange small test process development, pilot amplification, and lithium reagent low temperature reaction process development and application. Among them, the design of the reaction and reactor were all independently completed within the company, and patent applications relating to intellectual property rights have been submitted; in terms of enzyme catalysis, 9 patent applications for innovative APIs related to enzyme catalysis have been submitted, and successfully used enzyme catalysis technology to construct an anti-HIV drug Multiple chiral centers; in terms of photochemistry, photochemical technology is used in two API projects to carry out technological innovation; in the formulation business, the company has formed a research pipeline of more than 10 projects, including 6 treatment projects for central nervous system diseases, 3 projects for treatment of endocrine system diseases, and 2 treatment projects for antiviral and other diseases.

Implement an equity incentive plan to further stimulate employee motivation: The company issued the 2020 Restricted Stock Incentive Plan (draft). In this incentive plan, the total number of people to be motivated by the company is 95, covering the company's directors, executives, middle management and core cadres. At the same time, the company set performance assessment requirements. In 2020/2021/2022, the net profit growth rate was not less than 30.0%/30.8%/29.4%, respectively, fully demonstrating the company's confidence in future development. We believe that the company's announcement of an equity incentive plan will further stimulate employees' enthusiasm for work and help the company further improve its operating efficiency.

Investment advice: Buy-A investment rating. We expect the company's revenue growth rates from 2020 to 2022 to be 26.3%, 38.9%, and 20.4%, respectively, and net profit growth rates of 40.1%, 65.0%, and 26.9%, respectively, with outstanding growth. Maintaining the buy-A investment rating, we are optimistic about the long-term development prospects of the company's CDMO business. The current stock price is equivalent to a dynamic price-earnings ratio of 47 times 2021.